2007 (9) TMI 449 - AT - Income Tax

Summary

Issues Involved:
1. Whether the restructuring expenses claimed by the assessee should be allowed as revenue expenditure under section 37(1) or should be amortized as per section 35DD.
2. Whether the order passed by the Assessing Officer was erroneous and prejudicial to the interest of the revenue.

Issue-wise Detailed Analysis:

1. Whether the restructuring expenses claimed by the assessee should be allowed as revenue expenditure under section 37(1) or should be amortized as per section 35DD:

The assessee filed its loss return for the assessment year 2002-03, claiming a total loss of Rs. 3,35,78,630. The Assessing Officer determined the total income at a loss of Rs. 3,34,49,260. The Ld. CIT found the order erroneous and prejudicial to the interest of revenue because the assessee had debited Rs. 1,10,33,843 as restructuring expenses in the P&L account, which included actual expenditure incurred (Rs. 37,88,563), provision for restructuring expenses (Rs. 58,81,763), and payment towards VRS (Rs. 13,63,516). Under the Income-tax Act, restructuring expenses are allowable under section 35DD and VRS payment under section 35DDA. As per section 35DD, restructuring expenses are allowable at 1/5th of the total expense over five years. The assessee claimed the full amount as a deduction, which was allowed by the Assessing Officer.

The assessee argued that the expenses were for relocating its office from Delhi to Kolkata, which were revenue in nature and allowable under section 37(1). The Ld. CIT, however, noted that the relocation and merger were concomitant and simultaneous events, and the expenses were related to the merger, thus falling under section 35DD.

The Tribunal found that the details regarding the actual expenses incurred were not before the Assessing Officer, and the Assessing Officer did not raise any specific query regarding these expenses. The Tribunal concluded that the expenditure of Rs. 37,88,563 was incurred for the purposes of amalgamation/merger and should be allowed on a proportionate basis as per section 35DD, not as revenue expenditure under section 37.

2. Whether the order passed by the Assessing Officer was erroneous and prejudicial to the interest of the revenue:

The Ld. Counsel for the assessee argued that the Assessing Officer had verified the expenses and accepted the claim made by the assessee. The Ld. CIT invoked section 263, stating that the order was erroneous and prejudicial to the interest of the revenue because the Assessing Officer allowed the full deduction of restructuring expenses under section 37(1) instead of section 35DD.

The Tribunal upheld the Ld. CIT's decision, stating that the Assessing Officer had not made any inquiry or verification regarding the restructuring expenses and had simply accepted the computation of income filed by the assessee. The Tribunal referred to the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which held that an order passed without application of mind is erroneous and prejudicial to the interest of the revenue.

The Tribunal dismissed the appeal of the assessee, concluding that the expenditure was related to the amalgamation/merger and should be allowed on a proportionate basis under section 35DD. The order of the Assessing Officer was found to be erroneous and prejudicial to the interest of the revenue, justifying the Ld. CIT's invocation of section 263.